Micro Chapter 28

Labor Demand Curve Shifts

1) Changes in the demand for the final product will shift the demand for labor in the same direction. 2) Changes in labor productivity will shift the demand for labor in the same direction. 3) Changes in the price of related factors will shift the demand for labor in the same direction.

Derived Demand

Input factor demand derived from demand for the final product being produced.

Labor Supply Curve

It is upward-sloping for the entire industry, but perfectly elastic) horizontal for the individual firm.

Marginal Revenue Product (MRP)

Marginal Physical Product times Marginal Revenue. It is the additional revenue obtained from a one-unit change in labor input.

Marginal Factor Cost (MFC)

The cost of using an additional unit of an input. It equals the change in total cost over change in amount of resource used. In a perfectly competitive environment, each worker is paid the same wage, so this is equal for every input value.

Price Elasticity of Demand for Inputs

This will be greater when... 1) Price elasticity of demand for final product is higher. 2) It is easier to employ substitute inputs in production. 3) There is a larger proportion of total costs accounted for by the particular variable input. 4) There is a longer time period for adjustment.

Utilization of Multiple Factors of Production (Land, Labor, and Capital)

To minimize total costs for a particular rate of production, the firm will hire factors of production up to the point at which the marginal physical product per last dollar spent on each factor of production is equalized. (MPP of Input 1 / Price of Input 1) = (MPP of Input 2 / Price of Input 2)

Monopoly in the Product Market

Unlike perfectly competitive firms, monopolistic firms face a downward-sloping demand curve and an even steeper downward-sloping MRP curve due to falling marginal revenue and price per labor unit increase. The monopolistic firm still hires roughly until the wage rate is equal to MRP. Thus, monopolized industries hire fewer workers than perfectly competitive industries.

Advantages of Outsourcing

We must remember that outsourcing is a two-way street. The US outsources in other nations, but other nations also outsource in the US. Thus, outsourcing serves kind of like a global trading system, where people specialize according to comparative advantage.

Outsourcing

When a firm engages in employment of labor outside the country in which it is located. When industries at home can easily obtain foreign labor services that are a close substitute for home labor services, home labor demand will fall.

Marginal Physical Product of Labor (MPP)

Change in output resulting from the addition of one unit of labor. This holds all other factors of production constant. Because of the law of diminishing marginal product, it declines as more labor is added.